Corporate Debt Choice and Bank Capital Regulation

Haotian Xiang
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Haotian Xiang: Wharton School of the University of Pennsylvania

No 327, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: I investigate the impact of bank capital requirements in a business cycle model with corporate debt choice. Compared to non-bank investors, banks provide restructurable loans that reduce firm bankruptcy losses and enhance production efficiency. Raising capital requirements eliminates deposit insurance distortions but also deposit tax shields. As a result, firms cut back on both bank and non-bank borrowing while going bankrupt more frequently. Implementing an optimal capital ratio of 11 percent in the US produces limited marginal impacts on aggregate quantities and welfare.

Date: 2018
New Economics Papers: this item is included in nep-ban, nep-bec, nep-dge, nep-fdg and nep-rmg
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